To grow, China must walk state-market tightrope

To maintain its growth trajectory, China must rein in credit expansion, increase tax and invest in public services

By Joseph Stiglitz

Likewise, although China has already made progress in moving away from manufacturing toward a service-based economy (the GDP share of services exceeded that of manufacturing for the first time last year), there is still a long way to go. Already, many industries are suffering from overcapacity, and efficient and smooth restructuring will not be easy without government help.

China is restructuring in another way: rapid urbanization. Ensuring that cities are livable and environmentally sustainable will require strong government action to provide sufficient public transport, public schools, public hospitals, parks and effective zoning, among other public goods.

One major lesson that should have been learned from the post-2008 global economic crisis is that markets are not self-regulating. They are prone to asset and credit bubbles, which inevitably collapse — often when cross-border capital flows abruptly reverse direction — imposing massive social costs.

The US’ infatuation with deregulation was the cause of the crisis. The issue is not just the pacing and sequencing of liberalization, as some suggest, the end result also matters. The liberalization of deposit rates led to the US’ savings and loan crisis in the 1980s, while the liberalization of lending rates encouraged predatory behavior that exploited poor consumers. Bank deregulation led not to more growth, but to more risk.

One hopes China will not take the route that the US followed, with such disastrous consequences. The challenge for Beijing’s leaders is to devise effective regulatory regimes that are appropriate for its stage of development, a move that will require the government to raise more money. Local governments’ current reliance on land sales is a source of many of the economy’s distortions and much of the corruption.

Instead, the authorities should boost revenue by imposing environmental taxes (including a carbon tax), a more comprehensive progressive income tax (including capital gains) and a property tax. Moreover, the state should appropriate, through dividends, a larger share of SOEs’ value — some of which might be at the expense of these firms’ managers.

The question is whether China can maintain rapid growth — though somewhat slower than its recent breakneck pace — even as it reins in credit expansion that could cause an abrupt reversal in asset prices, confronts weak global demand, restructures its economy and fights corruption. In other countries, such daunting challenges have led to paralysis, not progress.

The economics of success are clear: higher spending on urbanization, healthcare and education funded by increases in taxes could simultaneously sustain growth, improve the environment and reduce inequality. If Beijing’s politics can manage the implementation of this agenda, China and the entire world will be better off.

Joseph Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.